Our reserves were saved for times just like these

PUBLISHED : Wednesday, 04 March, 2009, 12:00am
UPDATED : Wednesday, 04 March, 2009, 12:00am

It would be hard to conjure up a proposal as mean, irrelevant and typical of the small-town attitudes of Hong Kong's so-called leaders as last week's budget. It is a classic product of bureaucrats (and fellow-travelling academics), secure in their high-paying jobs for life and inflation-proof pensions paid for by a community that would sack them, given half a chance. It displays an ignorance of economics, business, actual social problems and the state of the world.

At the bottom is the tight-fisted claim that, because Hong Kong is a relatively small and trade-dependent economy, there is little the government can do through its tax and spending policies to alleviate the impact of a global recession; therefore, there is no point spending precious reserves to try to boost demand. So, in the face of the steepest downturn since at least 1974, the government is aiming for a deficit of just 2.4 per cent of gross domestic product (and that is an exaggeration as it includes a HK$3 billion bond repayment).

It is not true that raising the deficit to HK$65 billion, or 4.5 per cent of GDP, would do little to create employment. Even that is small compared with many other economies' targets. If aimed at consumption, it would have a quick and positive impact on demand and employment. It could easily be sustained for at least two years by an economy running a huge current-account surplus and by a government with some HK$800 billion in various reserves.

It is also indicative of the myopia of local officials who know little of the outside world. Mainland China understands why a massive stimulus is necessary both for its own people and for the world. But Hong Kong apparently thinks otherwise, despite its huge reserves. The world, according to Chief Executive Donald Tsang Yam-kuen and his financial secretary, John Tsang Chun-wah, must rescue Hong Kong which, despite its riches, is not prepared to do its part to help sustain global demand and so prevent the advance of protectionism. It is a profound disgrace, not least when even normally surplus-obsessed Singapore is willing to dig deep into its reserves and Taiwan, with its huge foreign reserves, is handing out coupons to citizens.

Instead of providing any help to businesses facing cash squeezes, which can lead to layoffs, the budget's main effort to help employment is a plethora of small schemes whose main benefit will be to increase the size of the bureaucracy.

The government bleats about the possibility that recession may be prolonged and thus we must conserve resources, otherwise reserves will be dangerously depleted. This is nonsense. First, the objective of policy here, as elsewhere in the world including the mainland, is to try to stop a recession becoming a multi-year phenomenon. If John Tsang is correct, he is implying that the mainland will have years of near-zero growth. Take note, Premier Wen Jiabao!

Second, the government's spending increase in the coming year is focused almost entirely on infrastructure projects that cannot begin immediately but, once started, will absorb funds for several years. If John Tsang was serious about limiting future deficits, he would have focused on quick-acting recurrent spending and tax breaks that could be easily withdrawn when conditions improve. Meanwhile, private construction remains at record low levels due to government unwillingness to let land prices fall. Again, vested interests take precedence over broader needs.

I wrote back in November that conditions were such that Hong Kong should look to run a deficit of at least 3 per cent of GDP. By last month, the global situation had further deteriorated to the extent to justify at least 5 per cent. Few disagreed, regardless of their economic views or sectoral interests. It is pleasing to see so many different sectors condemning this budget - and alarming to read the comments of the officials and Executive Council members defending it. What planet do they live on?

Philip Bowring is a Hong Kong-based journalist and commentator